You might be surprised to learn that legally, it is unlikely that you NEED any insurance for your company. However, it may be that you are contractually obliged to carry a certain amount of insurance, and then of course there are the insurances that are good practice to carry. This CQOTW covers the most common types of insurance contractors need to consider:
Professional Indemnity Insurance
As a contractor you are essentially selling your professional knowledge and expertise. If you make a mistake or provide bad advice, which results in your client suffering a loss, your PI cover will cover any claim the client makes against you. PI will also cover the cost of defending any actions taken against you if your client takes you to court.
Although it is not a legal requirement to hold PII, many clients and agencies are insisting that contractors have it and will request a copy of your cover certificate before you are allowed on site, or to start on a contract.
Employer’s and Public Liability Insurance
If you have employees (other than yourself) it is a legal requirement that you have employer’s and public liability insurance. It provides cover against compensation claims should an employee suffer an injury or illness due to their work for you. As a minimum, businesses should have £5 million in cover, and a fine of £2,500 a day could be charged for every day you are uninsured.
Public Liability Insurance is not a legal requirement and, for all practical purposes, is unnecessary for a contractor working for a single client as, generally the client will hold their insurance which will cover contractors in a similar way to their own employees.
Generally speaking, the three types of insurance above are included in what’s known as a Combined Policy.
Accident and Sickness Insurance
It’s important to remember that an independent contractor will not have Accident and Sickness cover provided in the same way that most employees have. As the name suggests, this type of cover can provide a financial lifeline if you become sick or have an accident and are unable to work. While there is no legal requirement to carry this insurance, it could be good practice for a contractor to have this as, quite simply, if you do not work, you do not get paid.
Your company can pay Accident and Sickness Insurance on behalf of the company director(s) but this will be assessed as taxable benefit-in-kind and therefore will attract both tax and national insurance.
Relevant Life Cover
Relevant Life Cover is a tax-efficient life insurance policy, allowing companies to offer a death-in-service benefit to its employees (including salaried directors). It's set up by the company and pays out a tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured. The proceeds go directly to the employee's family or financial dependents.
Relevant life cover is just like any other Life Insurance policy with the key difference being that it is very tax efficient: the company can make the payments and get tax relief on them. Any pay out to the beneficiaries is also tax free and generally outside inheritance tax.
Tax Enquiry Insurance
Contractors are increasing becoming the target of HMRC and, if you unfortunate enough to be selected for investigation, the whole process can be stressful and expensive. Tax Enquiry Insurance will cover the cost of professional representation in such an event. This could be accountant’s fees for a simple enquiry, all the way to Barristers/QC fees in the event of an enquiry reaching the high court.
If you have any questions about any of the insurance mentioned above, please do get in touch. We have partnered with professional insurance providers who we can put you in touch with.